Abstract

This paper investigates the effects of different degrees of wage setting centralisation on the
incentive of a MNE to locate in a host country, and on the host country's welfare. Decentralised
and centralised wage bargaining are considered. The nature of product market competition
between the MNE and domestic ®rms proves crucial to results which cast doubt on some of the
conventional wisdom on FDI. In particular, we show that: (i) it is not always welfare improving to
attract inward FDI, and (ii) the MNE may prefer centralised to decentralised wage setting
regimes.